The stage, it appears, is being set for giving the issue of retrospective taxation, introduced in the last Budget, a quiet burial. The Parthasarathi Shome committee, originally constituted to frame guidelines for General Anti Avoidance Rules (GAAR), was handed the additional mandate of examining the taxation principles on transfer of shares in a foreign company with underlying assets in India. The immediate provocation for this was the furore over the retrospective amendment to tax laws in the last Budget that rendered Vodafone liable to pay a tax of Rs. 11,200 crore despite the Supreme Court ruling in its favour early this year. Amidst threats that this amendment would permanently antagonise foreign investors, Prime Minister Manmohan Singh referred the issue to the Shome committee well after the man who started it all in the Budget, Pranab Mukherjee, was safely settled in Rashtrapati Bhavan. The committee has now delivered its draft report, which should be music to the ears of Vodafone and other foreign investors. If accepted, the recommendations will completely nullify the Budget proposal and let not just Vodafone off the hook but also foreign portfolio investors investing in the stock market through the undesirable route of participatory notes (P-notes).
The committee has rightly said that the retrospective application of tax law should happen in the rarest of rare cases and for one of three reasons only: to correct anomalies in the statute, to matters that are clarificatory in nature such as technical/procedural defects that vitiate the substantive law and, lastly, to protect the tax base from abusive tax planning schemes whose main purpose is to avoid tax. Yet, in a touching display of affection for Vodafone, Mr. Shome’s report says that even in the exceptional situations where the law is applied retrospectively on the indirect transfer of assets, the taxpayer in question should not be slapped with interest and penalties on the tax deemed as payable. The grounds? There should be “no undue hardship caused to the taxpayer” even if the taxpayer in question is guilty of aggressive tax planning — a concession that is not extended to common taxpayers who are penalised even for small lapses. The Shome panel may also have given a leg-up to foreign portfolio investors using the P-note route, which has been frowned upon by the stock market regulator SEBI, as it hides the identity of the investor. This route has been used by industrialists to rig up their share prices in the recent past and SEBI had placed temporary restrictions on P-notes a couple of years ago. Given this, it is surprising that the committee has now recommended that they should not be taxed.